Why Real Estate?
6 Things to LOVE About Real Estate and Why?
Approximate Reading Time: 6 Minutes
Real estate is considered one of the very best ways to build real wealth. We can thank the government and big banks for a lot of it…aka inflation, tax deductions, and the 30 year fixed mortgage.
The bottom line: investing in real estate is smart because property is tangible. People always have, and always will, need shelter. This means it is very unlikely that our need for shelter (ie: buying or renting homes) will ever go away.
Here are 6 more extraordinary benefits of investing in real estate:
1 – Inflation
If you think the safest place for you money is in a shoebox under your bed, think again. Why? Because of inflation.
Inflation causes the price of goods and services to rise over time. This includes food, rent, wages, real estate prices, stocks, etc. The only things that do not increase in value, as a result of inflation, are cash and bonds. In other words, cash actually holds less value over time, making it a poor choice for long-term savings.
On the flip side, there is one asset that is (almost) always guaranteed to increase in value with inflation. This asset is real estate.
Why does the cost of real estate fluctuate in response to inflation?
It’s because people always have, and always will, need real estate. As a result, real estate prices must stay aligned with average wages, taxes, and expenses so that residents can actually afford to buy homes. This is a good thing for investors: as long as you’ve invested in the right markets, at the right time, you’re real estate investment should increase in value along with inflation, at a rate of about 2% per year.
2 – Immediate Profits
It is possible to make profit from your real estate investment within the first six months, if you know how to “force” appreciation. This is the process of buying a home and making improvements that increase the property value. The profit is considered forced appreciation because it took effort, not just timing of market cycles or inflation. (Note: not all improvements increase value.)
Terms To Know: Forced Appreciation is the process of buying a home and making improvement that increase the property value. The profit is considered forced appreciation because it took effort, not just timing of market cycles or inflation. However, not all improvements increase value.
3 – Refinancing
Once you sell a house, it’s over. You will never make any more money off of it. But a property you hold onto will continue to make you money every year, and at the same time the value of the property will appreciate. The best part: you don’t even need to sell the home to free up money for another investment. This is where the saying “Ref til you die” comes from!
According to Kathy Fettke, “the only time you should consider selling a property is if it’s not working for you.”
4 – Fixed Mortgages
Often people think they can’t buy real estate until they are already rich. This is false. It is definitely easier to pay cash, but your returns are much higher if you borrow money.
Terms To Know: A fixed-rate loan is simply a loan that has a fixed rate for the life of the loan. This means that the amount of your loan payment will never change. In other words, if your current loan payment is $500 per month, it will still be $500 per month 10 years from now.
In the U.S. we’ve become so accustom to this type of loan (ie: the 30-year fixed rate mortgage), that we take it for granted. And we shouldn’t. Why? Think about it. If you were lending money, would you lend it to someone for 30 years for the same monthly payment KNOWING inflation will eat up it’s value?
5 – Loan Leverage
Leverage is one of the greatest advantages used by real estate investors. Investopedia defines leverage as: “the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.” This is an important concept to understand, because it can help you achieve a much higher return on your property.
Did you know?
“Banks will lend you up to 10 loans for investment properties, as long as you have good credit, a 2 year job history, low debt-to-income ratios and reserves?
Assuming you are buying a rental property worth around $100,000, you’ll need to have about $20,000 for a down payment. You’ll also need about $3000-$5000 for closing costs and approximately 6 months worth of mortgage payments set aside in savings to cover potential vacancies or unexpected expenses.
All told, you’ll need around $30,000 in liquid funds in order to obtain an $80,000 mortgage. With this kind of 80/20 leverage, you should be able to realize returns of 15-25% on rental property!” — Kathy Fettke
6 – HUGE Tax Breaks
Did you know that owning rental property can give you huge tax advantages? That’s right. You can deduct almost all expenses incurred as part of your cost of doing business, and you can also deduct things like depreciation, property taxes, repairs, maintenance, and more. All this can add up to a lot of free money at the end of the year.